Date published: February 21, 2017
While scarcity and historical earnings certainly influence Blue Sky multiples, risk profile plays squarely into the multiple that buyers are willing to pay for certain franchises.
For example, the franchises that are trading at a 4 multiple or under would seem highly attractive to a buyer focused on ROI, but many buyers are keenly aware that these franchises also bring with them more operational risk – so the ROI can quickly go south given poor execution. These are the classic high risk / high return investments, which can pay off for great operators. But for untested or average operators, buyers beware.
Conversely, there is still very high demand for strong luxury franchises which command much higher valuation multiples. This is because these brands, for the most part, are consistently profitable and buyers are willing to deploy more capital (increasing risk to returns on capital) to gain the lower operational risk profile.
That leaves us with the franchises in the middle. These brands provide a very attractive risk-adjusted return on investment. The variability of these franchise earnings is less extreme than the franchises to the left and the capital requirement is less extreme than the franchises to the right. For buyers who are highly focused on risk-adjusted ROI, we expect they will target domestics, whereas risk adverse buyers with slightly lower ROI expectations will be very happy with the top Japanese imports.
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